Sustainable Capital: Enabling Scale-ups to Deliver for the Next Generation
Toby Goldblatt
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3.29.21
The pandemic is in the process of redefining every industry and every geography. Its lasting effects have not yet been fully felt but at Renew we focus on building sustainable businesses for the next generation through capital talent and technology.
We get asked a lot what we mean by ‘Sustainable capital’ and its role in delivering businesses for the next generation.
At Renew, we see the deployment of sustainable capital as a chance to reboot globalisation with a broadened definition of value – covering environmental, societal and humane as well as financial. This is an investment for the next generation ie. next 5-20 years and focusing on the ‘scale up’ businesses (as opposed to startups or corporates) that will be the engine of growth across the world for jobs, security and overall prosperity for society.
This was covered most eloquently recently in Mark Carney's excellent article in the FT. One of the most interesting areas around the redefinition of value is the workaround ‘Doughnut Economics’ from Kate Raworth, which suggests a broader definition of value that includes things like equality, political voice etc is important in delivering a safe and productive space for humanity, see image below:
There is a lot of focus particularly in the tech world on startup investment often through private equity or venture capital. This is clearly one of the most exciting and fast-growing areas of five of effective capital deployment however many of the businesses are still small and early-stage as 1 out of 200 startups reach the Scale-Up minimum threshold of $10 million in revenue by their fifth year.
We love this quote from Emmitt Keefe, Founder of Insite venture partners:
"Startups need to graduate. ScaleUps are the true driver of economic growth, employment security, and tangible innovation"
ScaleUps represented less than 2% of all companies yet created 35% of all gross job gains (Source: Wakefield / Insite Venture Partners Scale-Up Report). However, the CEO’s of scale-ups see this phase as the most challenging in their evolution, as they expand beyond their known network. Scale-ups are the engines of global growth, and we see capital transaction tools like acquisition and disposal having a significant role in accelerating and intensifying their impact.
There are many fast-growing teams or divisions of large scale legacy organisations that would be better served as ‘bolt-ons’ to smaller organisations, enabling them to scale-up more rapidly.
We often see that large scale corporates have built up significant amounts of financial, technical, operational and cultural ‘debt’ over recent years, impacting their agility. All too often this means that are not enable to ‘step up’ the overall business to the same level of growth being delivered by their fastest-growing divisions. In short, the complexity, history & bureaucracy of the organisation has often become an ‘anchor’ weighing the innovative division down, and slowing productivity growth for all.
These innovative divisions - often typified by those who have adopted the high growth levers of cloud, AI & IoT, customer experience, automation most naturally – then find themselves falling behind smaller, more agile competitors, making it harder to attract talent and investment. This is typically the time when a divestment will maximise value for all. These divestments are tricky to undertake and the negotiation process requires a significant focus on cultural alignment and the development and creation of a shared market vision & strategy.
M&A is running every very hot right now and valuations are very high. This is clearly going to be a critical element for driving renewed economic growth in the next few years. In addition, the innovation created by SPACS - integrating rapidly scaling organisations into predetermined listed organisations, is proving a further catalyst.
Legacy corporates are often looking to transform themselves through M&A and significant time, effort and capital is deployed. However, the incremental value acquisitions ultimately delivered (outside of for the shareholders) is often questionable, as each acquisition simply adds more complexity. Again, our view is that a shared market vision based on building a sustainable business future is necessary, but all too often overlooked.
Of course ESG (Environmental, Societal & Governmental) is at the forefront of everybody minds right now. We are also becoming familiar with the risks of ‘greenwashing. The areas we are currently exploring that qualify sustainable business growth include:
However we recognise we are very early on area, but countries around are keen to take the lead. The Government of Japan has recently called for ‘Digital Green Equity’ in an article recently published in the Financial Times.
As we emerge out of this global health crisis, digitalisation will permeate our economies evermore. We must however focus on and address the concerns about technology’s divisive impact on society: How can the transformative technologies of Internet of Things, AI, and Humane use of technology boost social inclusion rather than widen gaps between the digitally dextrous and the disadvantaged? How can digitalisation ensure growth for both cities and rural regions? And how can these technologies be better deployed to achieve carbon neutrality?
Our answers to these questions will determine whether we are taking a sustainable approach to capital, that is delivering a sustainable business future for all.
